Eichengreen on Ron Paul and Gold: Part One: A critique of pure bullshit:

Washington has a problem, and Barry Eichengreen is doing his bit to save it. The problem’s name is Ron Paul, and this problem comes wrapped in 24 carat gold:

GOLD IS back, what with libertarians the country over looking to force the government out of the business of monetary-policy making. How? Well, by bringing back the gold standard of course.

Last week, Eichengreen published a slickly worded appeal to libertarian-leaning Tea Party voters, who, it appears, are growing increasingly enamored with Ron Paul’s argument against ex nihilo money and the bankster cartel through which Washington effects economic policy.

The pro-gold bandwagon has been present in force in Iowa, home of the first serious test of GOP candidates for that party’s presidential nomination. Supporters tried but failed to force taxpayers in Montana and Georgia to pay certain taxes in gold or silver. Utah even made gold and silver coins minted by Washington official tender in the state. But, the movement is not limited to just the US: several member states of the European Union have made not so quiet noises demanding real hard assets in return for more bailout funds for some distressed members burdened by debt and falling GDP.

No doubt, these developments are a growing concern in Washington precisely because demands for real assets like commodity money threaten to blow up its eighty year old control of domestic and global economic activity through the continuous creation of money out of thin air.

Although Eichengreen invokes the difficulty of paying for a fill up at your local gas station, “with a $50 American eagle coin worth some $1,500 at current market prices”; the real problem posed by a gold (or any commodity) standard for prices is that such a standard sounds a death-knell to a decades long free ride for the very wealthiest members of society, and would end the 40 years of steady erosion of wages for working people here, and in countries racked by inflation and severe austerity regimes around the world.

Make no mistake: Ron Paul is now one of the most dangerous politicians in the United States or anywhere else, because his message to end the Federal Reserve Bank and its control of monetary and employment policy has begun to approach the outer limits of a critical mass of support — if not to end the Fed outright, than at least to bring the issue front and center of American politics.

Eichengreen begins his attack on Ron Paul’s call for an end to the Federal Reserve by choosing, of all things, Ron Paul’s own writings as weapon against him:

Paul has been campaigning for returning to the gold standard longer than any of his rivals for the Republican nomination—in fact, since he first entered politics in the 1970s.

Paul is also a more eloquent advocate of the gold standard. His arguments are structured around the theories of Friedrich Hayek, the 1974 Nobel Laureate in economics identified with the Austrian School, and around those of Hayek’s teacher, Ludwig von Mises. In his 2009 book, End the Fed, Paul describes how he discovered the work of Hayek back in the 1960s by reading The Road to Serfdom.

For Eichengreen, Paul’s self-identification with Hayek is a godsend, because, as Eichengreen already knows at the outset of his article, Hayek ultimately opposed the gold standard as a solution to monetary crises:

At the end of The Denationalization of Money, Hayek concludes that the gold standard is no solution to the world’s monetary problems. There could be violent fluctuations in the price of gold were it to again become the principal means of payment and store of value, since the demand for it might change dramatically, whether owing to shifts in the state of confidence or general economic conditions. Alternatively, if the price of gold were fixed by law, as under gold standards past, its purchasing power (that is, the general price level) would fluctuate violently. And even if the quantity of money were fixed, the supply of credit by the banking system might still be strongly procyclical, subjecting the economy to destabilizing oscillations, as was not infrequently the case under the gold standard of the late nineteenth and early twentieth centuries.

Eichengreen pulls off a clever misdirection against Ron Paul by deliberately conflating the problem of financial instability with the problem of limiting Fascist State control over economic activity. Ron Paul’s argument, of course, is not primarily directed at eliminating financial crises, which occur with some frequency no matter what serves as the standards of prices, but at removing from Washington’s control over economic activity not just at home, but wherever the dollar is accepted as means of payment in the world market — and, because the dollar is the world reserve currency, that means everywhere. But, by conflating the question of Fascist State control over the world economy with solving the problem of financial and industrial crises that are endemic to the capitalist mode of production, Eichengreen takes the opportunity to foist an even more unworkable scheme on unsuspecting Ron Paul supporters: privatize money itself:

For a solution to this instability, Hayek himself ultimately looked not to the gold standard but to the rise of private monies that might compete with the government’s own. Private issuers, he argued, would have an interest in keeping the purchasing power of their monies stable, for otherwise there would be no market for them. The central bank would then have no option but to do likewise, since private parties now had alternatives guaranteed to hold their value.

Abstract and idealistic, one might say. On the other hand, maybe the Tea Party should look for monetary salvation not to the gold standard but to private monies like Bitcoin.

It is cheek of monumental — epic — proportion. Even by the standards of the unscrupulous economics profession — a field of “scholarship” having no peer review and no accountability — the sniveling hucksterism of Eichengreen’s gambit is quite breathtaking. However, not to be overly impressed by this two-bit mattress-as-savings-account salesman, in the next section of this response to Barry Eichengreen, I want to spend a moment reviewing his examination of the problem of financial instability, and the alleged role of gold (commodity) money in “subjecting the economy to destabilizing oscillations… under the gold standard of the late nineteenth and early twentieth centuries.”

Part Two: Money and crises

Inflation, the negative rate of profit, and the Fascist State (Part seven)

In part one of this series, I showed how inflation affects not only consumption but also production. In the former, inflation expresses itself in the fall of the consumption power of the mass of society. In the latter, inflation expresses itself as a fall in the actual realized rate of profit — a negative rate of profit arising not from a material change in the composition of capital, but from a depreciation in the purchasing power of money. The two of these effects are achieved by one and the same cause. The two effects do not simply exist side by side, but influence each other: in the circulation of capital, excess money-demand effectively reduces the portion of the output of productively employed capital that is realized in sales. With an inflation rate of ten percent, a capital with value of $100 now can be realized only if $110 is offered for it. On the other hand, a capital with the actual value of $110, is effectively purchased for $100.

The problem here is that between the production of the commodity and its realization in a sale the purchasing power of the money has depreciated. The problem can be better understood if we divide value and price and examine each separately. If we assume a capital with the value of $100, represents 10 hours of socially necessary labor time, we can make the following observation: The capitalist takes his capital with a value of $100 or ten hours of labor time and produces a quantity of commodities with a new total value of $110, representing 11 hours of socially necessary labor time. However, during this same period, the purchasing power of money has changed so that 1 hour of labor time no longer has a price of $10, but has a new price of $11. His capital now has the value of 11 hours of labor time with an implied expected price of $121 (11 times 11 = 121), yet he only realizes $110, or 10 hours of labor time under the new price conditions.

From the point of view of value, the capitalist has taken his capital with a value of 10 hours of socially necessary labor and produced a capital with a value of 11 hours of socially necessary labor. Yet, of this 11 hours of value he only realizes 10 hours, i.e., he realizes no more than his original investment. From the point of view of price, the capitalist has taken his capital with a money-price of $100 and produced a capital with a money-price of $110. He expects no more than $110 and is satisfied with this, despite the fact that this $110 in sales only has a value of 10 hours of socially necessary labor time.

The riddle of the divergence of prices from values

The riddle of this perverse situation can only be solved if we assume that a change occurred in the relationship between values and prices during the exchange of money and commodities — that the realization of the value of capital produced suffered from a defect such that a portion of the value this capital was lost in the act of exchange itself. This defect, as we showed in part three, is already inherent in the value/price mechanism itself. The value/price mechanism contains in itself a contradiction between the actual labor time expended on the production of a commodity and the socially necessary labor time required for its production; a contradiction between the value of the commodity itself and the expression of the value in the form of the price of the commodity; and, a contradiction between the price of the commodity denominated in units of the money and the socially necessary labor time required for the production of the object that serves as the money.

These contradictions exists only in latent form until crises bring them to the surface in a sudden divergence between prices and values of commodities. During periods of over-production of commodities — or, more accurately, over-accumulation of capital — these crises are expressed in the sudden collapse in the prices of commodities below their value, or socially necessary labor times. The divergence between prices and values of commodities only express the fact that for a more or less lengthy period of time wealth can no longer accumulate in its capitalistic form; and, as a result, the socially necessary labor time of society must contract to some point where the production of surplus value no longer takes place. Precisely because the circulation of capital requires not just the production of surplus value in the form of commodities, but also its realization in a separate act of sale of these commodities, the possibility exists for an interruption of the process of realization for a longer or shorter period of time until balance between production and consumption is restored — that is, until conditions exist for the total social capital to once again function as capital; for the process of self-expansion of the total social capital to resume.

If, for whatever reason, conditions are not established for the total social capital to resume functioning as capital — for the process of self-expansion of the total social capital to begin again — production itself must cease. The interruption of exchange — which, I note for the record, begins not with too much money-demand for too few commodities, but precisely the reverse — creates a sudden fall in the rate of profit to zero. If this occurs not as an intermittent breakdown, but as a permanent feature of capitalist production — which is to say, if the over-accumulation of capital is not momentary, but a now permanent feature of the mode of production — capital has encountered its absolute limit as a mode of production. From this point forward the production of wealth can no longer take its capitalistic form — can no longer take the form of surplus value and of profit.

Over-accumulation of capital and civil society

Moreover, since the production of surplus value is the absolute condition for the purchase and sale of labor power, the sudden interruption of its production affects not just the capitalist class, but the class of laborers as well — it appears in the form of a social catastrophe threatening the existence of the whole of existing society, and all the classes composing existing society without regard to their respective place in the social division of labor. Each member of society encounters the exact same circumstance: she cannot sell her commodity, whether this commodity is an ordinary one — shoes, groceries, etc. — or the quintessential capitalist commodity, labor power. The premise of all productive activity in society is that this activity can only be undertaken if it yields a profit; if, in other words, the existing socially necessary labor time expended by society realizes, in addition to this value, additional socially necessary labor time above that consumed during its production.

Marx argues in Capital Volume 3 that capitalist production presupposes a tendency toward the absolute development of the productive forces of society, irrespective of the consequences implied by this development for capital itself. What does Marx mean by this? As a mode of production, capital shares with all previous modes of production the feature of being founded on natural scarcity, on the insufficiency of means to satisfy human need. Yet, at the same time, it implies a tendency for the productive capacity of society to develop more rapidly than consumption power of society — a tendency for more commodities to be thrown on the market at any given time than society can consume under the given conditions of exchange. What society can consume at any given moment is not determined simply by the amount of commodities available to be consumed, but by class conflict between the mass of owners of capital and the mass of laborers; a conflict which presupposes the reduction of the consumption power of the mass of laborers to some definite limit consistent with the realization of profits.

That this conflict, absent a successful attempt on the part of the mass of society to end the monopoly over the means of production by an insignificant handful of predators, must be settled in favor of capital and, therefore, that production is constantly kneecapped by  completely artificial limits on consumption, is already given by capitalist relations of production themselves — relations which nowhere figure in the description of capital by simple-minded economists, who instead ascribe this barrier to the gold standard, etc.

This contradiction — that the productive power of society tends toward its absolute development, yet the consumption power is constantly constrained by the need to produce commodities at a profit — implies that at a certain point in capital’s development production and consumption come into absolute conflict — a conflict which, on the one hand, cannot be resolved by simply increasing this productive power still further, nor by limiting consumption still more severely. It can only be overcome by such means as overthrow capitalist relations entirely, or, alternately, destroy both the productive and consumption power of society together in one and the same act of exchange.

Exchange and disaccumulation, or, the destruction of value through exchange

I have made the assumption that both the productive power of society and the consumption power of society are destroyed by one and the same act of exchange. Based on this assertion, I define inflation not simply as the increase in money-demand over the supply of commodities, but the actual destruction of the productive power of society and consumption power of society during the act of exchange. Or, what is the same thing, by the progressive reduction of the total social capital circulating within society, i.e., the reduction of the quantity of the existing total social capital which continues to function as capital within society, through exchange.

I have also made the assumption that this same act of exchange also expresses,

1. the contradiction between the actual labor time expended on production of commodities and the socially necessary labor time required for production of these commodities — inflation, therefore, expresses itself as a declining portion of the total labor time expended by society that is socially necessary, or, alternately, the constant increase in the total labor time of society in relation to the social necessity for productively expended labor time;
2. the contradiction between values of commodities and the expression of these values in the prices of commodities — inflation, therefore, is expressed as a decline in the value of commodities as a proportion of the prices of commodities, or, alternately, the constant increase in the prices of commodities in relation to their values; and,
3. the contradiction between the prices of commodities denominated in units of the legally defined money and the price of the commodity that historically served as the money — inflation, therefore, is expressed in the constant depreciation of the exchange ratio of the money token against the commodity historically serving as the standard of price, or, alternately, as the rising price of the commodity historically serving as the standard of prices denominated in the money token, i.e., a secular rise in the price of gold.*

The conditions of this act of exchange, which destroys both the productive power of society and its consumption power — and which, on this basis, progressively reduces the quantity of the existing total social capital which continues to circulates as capital and function as capital on this basis — is fulfilled only by exchange of that portion of the newly created social capital representing surplus value with ex nihilo money, and the unproductive consumption of this newly created value by the Fascist State. Moreover, this unproductive consumption of the newly created surplus value is only fulfilled if it is entirely unproductive in all of its forms, i.e., whether this unproductive consumption takes the form of the unproductive consumption of commodities, of labor power, or, of the fixed and circulating capital.

Fascist State expenditures consist entirely of removing the surplus product of labor from circulation, consuming it unproductively, and replacing this surplus product in circulation with a valueless ex nihilo money that formally completes the act of exchange, but that in reality abrogates it. The total mass of capital circulating within society is thereby reduced by this exchange, while the total money-demand in society is simultaneously increased.

The chief symptoms of inflation, therefore, is (1.) the unproductive consumption of the existing total capital by the Fascist State, no matter what form this unproductive consumption takes; (2.) the constant secular increase in Fascist State expenditures, no matter how these expenditures are financed, but which is no more than the continuous exchange of every form of commodity (i.e., of capital in the form of commodities) for newly created valueless ex nihilo money; and, finally, (3.) the constant expansion of the total labor time of society beyond that duration required by the satisfaction of human needs. In tandem with the improvement in the productivity of labor, society is compelled to expend an ever greater amount of effort just to feed, house and clothe itself. In tandem with the reduction in the value of commodities, the prices of commodities soar still higher. In tandem with relentless expansion of Fascist State expenditures, the actual provision of necessary public services — education, health care, provision for the disabled and those no longer able to work, public infrastructure and communications — sink into decay and obsolescence.

The terminal trajectory of capitalist social relations is expressed precisely in the fact that at a certain stage of development the total social capital can no longer function as capital, can no longer realize the constantly increasing quantity of surplus value produced in the form of profits, that, to the contrary, this surplus value must be unproductively consumed in its entirety by the Fascist State and replaced by purely fictitious profits denominated in a purely fictitious money.

*****

*NOTE: I need clarify from Part Three that this third contradiction implies gold tends to exchange with other commodities at some exchange ratio below its relative value, despite its rising nominal price. As is obvious, if commodities are priced above their values, the purchasing power of gold — the physical body of exchange value — is exchanged below its value. This situation, which once occurred only during periods of general capitalist expansion, is now a permanent feature of exchange. It is, however, expressed through the intermediary of the money token by commodities being priced above their values, while gold is priced below its value. An existing quantity of money token can buy fewer commodities, but more gold, than otherwise expected. This inevitably leads to charges by gold-bugs that the price of gold is being deliberately suppressed, but I think it is actually a natural consequence of over-accumulation of capital — a condition normally seen at the apex of an expansion. Commodities in general are devalued, but this devaluation is expressed most thoroughly in the devaluation of the former money commodity which serves little other function in society but to express value.

Inflation, the negative rate of profit, and the Fascist State (Part six)

I need to digress for a moment to set everything I have discussed so far regarding inflation in the context of the world market. As will become clear, it is difficult, if not impossible to discuss inflation without taking into account the relation between the two. Inflation, as I have argued, can be understood as the chronic secular rise of prices for commodities, yet, it can also be understood as the chronic fall in the general level of consumption in an economy over a period of time. These two expressions of inflation do not simply exist as poles of a definition of inflation, but first and foremost as poles of the actually existing relation of production within the world market — a chronic, secular rise in prices of commodities on the one hand, and a chronic fall in the general level of consumption — of wages — on the other.

Inflation and the faux political battle over Austerity

One way to begin this is to look at the current faux political struggle unfolding in Washington over deficit spending by the Fascist State, since this faux struggle touches on one of the most glaring expressions of the imbalances within the world market. So, let’s examine the argument of the advocates of Austerity from the standpoint of Marx’s labor theory of value:

According to these sober persons, the United States must pay its debts. Since it must pay its debts — for instance, the US owes China $3 trillion — it must contain spending to a level consistent with this goal. Of course, the statement that the United States owes China $3 trillion is a non-sequitur in relation to domestic spending and taxes, since the US doesn’t pay China with revenues raised through taxes. It creates the money out of nothing. If China is concerned about getting its money, a faceless bureaucrat at the Treasury simply goes to a computer terminal and enters a 3 followed by 12 zeroes into an account designated by China. Now the PRC has its $3 trillion and we need not talk about Austerity. They get what we promised them: $3 trillion, and nothing more.

As the economist advocates of Modern Monetary Theory argue, this process is no different than what occurs when you withdraw cash from your savings account at the bank or transfer cash from your savings account to your checking account. US treasuries are simply China’s own savings account.

Now, what does China do with the $3 trillion? They have absolutely no domestic use for it, since the yuan serves as the domestic currency, not dollars. The PRC could use the money to import wage commodities to raise the material standard. But if they had any intention of doing this, the $3 trillion would not have been loaned to the United States in the first place. The PRC could also use the money to import capital commodities to increase the rate of domestic economic growth. However, even if they used the money this way. it would only result in more exports and even greater trade surpluses denominated in dollars. We have to assume that China has absolutely no use for the dollars — that the dollars are excess capital, which, since the PRC has no use for it, ends up being lent to the United States. And, since the United States can create as many dollars as they want, they have no use for it either.

The $3 trillion is valueless. And, if it is valueless, this implies all the crap they sold us is valueless as well. China sold us all this crap knowing we were giving them valueless dollars in return. We must assume they exchanged these commodities for American ex nihilo dollars because it couldn’t be sold otherwise. Since the crap was valueless unless they sold it to us for equally valueless dollars, the terms of the trade were met. Crap for crap; superfluous commodities, which, therefore, are not commodities at all, since they have no value, exchanged for a quantity of ex nihilo money that also has no value.

But, by the same token, the savings from austerity sought by the Austerians to repay China must also be valueless, since it consists entirely of these same ex nihilo dollars. Which implies that current expenditures by the Fascist State are also valueless, since the money spent domestically is the same as that to be paid to China. The money isn’t valueless because we owe it to China, it was valueless already — just as China’s crap is valueless unless it is sold. Whether it is used to repay China or spent on National Health Care, the money is completely valueless. Which means, not only is all that crap in China valueless, national health care is valueless as well. You cannot buy something with nothing unless that something is also nothing, i.e., has the same value as your means of purchasing it.

On the other hand, health care is definitely something, but so are socks made in China and sold at WalMart. By saying a thing exchanged for nothing must be nothing as well clearly has nothing to do with whether it is useful or necessary. The socks are useful, and so is an annual checkup. But, when exchanged for valueless dollars, they must also be valueless. It is not a question of whether these valueless dollars will go to pay China or to pay for health care.

The real question is why all of these useful goods continue to circulate in the form of commodities despite the valuelessness of the money? If we removed the valueless money from the equation entirely and allowed the goods to move as society demanded, nothing will have changed. Which is to say, if the goods were free, from the standpoint of value, nothing has changed. The fact that money serves as an intermediary in exchange here has no impact on the value of the things. Rather money is announcing, “These things for which I am exchanged have no value themselves. They, like me, are valueless in an economic sense, and, therefore, are no longer actually commodities.”

The absurdity of ex nihilo money

The absurdity is apparent: Money in this case only expresses that, from the standpoint of the law of value, there is no need for money. But this monetary expression takes the form of a valueless money. The sheer stupidity that money expresses its own superfluousness is already given in ex nihilo money. At the same time, this absurdity can only arise because, as a practical matter, the superfluousness of money appears absurd itself. Or, what is the same thing, a society founded on exchange of commodities has nevertheless come to be dominated by directly social production. This directly social production, for which exchange of commodities is entirely absurd, must nonetheless appear in the form of exchange – fictitious exchange. To accomplish this fictitious exchange requires a money form that is itself fictitious — ex nihilo money.

Although the exchanges taking place are fictitious, and use a currency that is entirely fictitious, the need for these fictions are real. The premise of all these fictions is that completely social conditions of production are nevertheless split up among the members of society. On the one hand, this division presupposes exchange of commodities, yet, on the other hand, this commodity exchange is entirely superfluous to the production of these commodities. The conflict between the conditions governing exchange and those governing production must be resolved; and they are, by fictions. But this “resolution” of the conflict between the conditions of exchange and the conditions of production can only intensify the antagonism between the two, and develop it to its most extreme limit.

Every nation attempts to resolve the conflict between the conditions of production and the conditions of exchange by issuing its own ex nihilo money. However, the limit of any nation to issue ex nihilo money rests on its ability to export more than it imports. According to Paul Krugman (2010) a nation can issue ex nihilo money only if it can run an export surplus and accepts a depreciation of its money. Moreover, in a flexible exchange rate system the export surplus becomes possible because issuing the ex nihilo money itself creates a tendency toward this depreciation of its currency. Thus, in a flexible exchange rate system, creating money ex nihilo produces a tendency toward export surpluses by depreciating the purchasing power of the ex nihilo money. The creation of fictitious money depresses the ability of the community to consume what it produces; it reduces the ratio of domestic consumption to domestic production — increased export is realized through the relative impoverishment of the community.

Since, in Krugman’s 2010 model every nation seeks a trade surplus by impoverishing itself — i.e., by reducing the portion of domestic production that is consumed domestically — who is consuming all of this now excess crap? Krugman’s 2010 model implies either the existence of a designated importer nation, or, the planet ends up with massive quantities of unsold excess commodities. What role does this designated importer play? If every other nation is running a trade surplus, the designated importer must run a trade deficit equal to the total surplus commodities produced by all the other nations. i.e., equal to the sum of excess capital in the form of excess commodities.

If the designated importer nation is running a chronic and growing export deficit, how does it pay for these imports? This designated importer has a fictitious currency every other nation must accumulate as payment for its exports. By law, only the State can create ex nihilo money. The responsibility of creating sufficient quantities of fictional money falls to it. The creation of ex nihilo money, however, is nothing more than the creation of fictitious profits — to the penny. If this creation is accomplished by issuing public debt, this public debt amounts to the fictional profits of private capitals. By increasing the public debt the owner of the world reserve currency can print money and buy all the crap. On the other hand, there is a tendency for the excess capital of the world market to be denominated in the world reserve currency.

However, since we are dealing with an actual material conflict between the conditions of production and the conditions of exchange under condition of absolute over-accumulation of capital, this conflict doesn’t disappear. It now appears as poles of international trade in the form of many net exporters on one side, who are accumulating fictitious dollar assets, and a net importer on the other side, who is accumulating a growing public debt; thus, the excess capital of the world market is increasingly denominated in the world reserve currency. This division of the world market into many net exporters and a single net importer has consequences for ex nihilo money creation itself: The capacity to grow export surpluses by creating ex nihilo money does indeed increase, but this increased capacity is only true for the designated importer nation. The export surplus nations actually end up with less capacity to create ex nihilo money, even as the designated importer nation gains in this capacity. Eventually, the export surplus nations must absolutely constrict their respective money supplies to contain inflation — producing, as a consequence, a growing surplus population of starving laborers. Although this conclusion is obvious, Krugman has not a hint of it in his 2010 paper.

Ex nihilo money, labor time, and the World Market

The problem is that directly social production abolishes the law of value, while exchange takes place only on the basis of this law. Under the capitalist mode of production, production is only undertaken with the eye to profit, i.e., to realization of surplus value. Yet, under conditions of absolute over-accumulation of capital, no additional surplus value can be realized, i.e., the profit rate is zero, if not negative. If the fiction of profits could not be maintained, production would cease entirely. To maintain this fiction, you need fictitious money.

To put this another way, under conditions of over-accumulation, directly social production limits the total labor time of the community to socially necessary labor time. And, what is the measure of this socially necessary labor time? Here is the somewhat surprising answer:

Socially Necessary Labor Time = Value = Wages.

Under conditions of over-accumulation of capital, the absolute limit of total socially necessary labor time is the value of the wages of the working class. Any value created in addition to this necessary limit — i.e., surplus value — cannot be realized as profit — it is wasted (or, superfluous) labor time. Profits realized under this regime must, by definition, be fictitious; hence the fiction of ex nihilo money.

If the production of surplus value no longer takes place, profit can be “realized” through exchange only on condition there is a continuous and pervasive unequal exchange of values within the world market. If labor power cannot be exploited to create surplus value, it must be constantly and artificially devalued — that is, purchased at a price below its actual value. This artificial (purely monetary) devaluation of labor power is a natural consequence of Fascist State ex nihilo money expenditures. This purely monetary devaluation of labor power goes hand in hand with a purely monetary devaluation of the fixed and circulating constant capital.

However, although labor power and the fixed and circulating constant capital are artificially devalued, this does not, by any means, imply a fall in the prices of these commodities — rather the situation is precisely the reverse. Under the conditions I am describing, the purely monetary devaluation is expressed inversely as rising ex nihilo prices for these commodities. They become dearer in ex nihilo money terms as their prices are held well over their actual values; in turn, society is compelled by generally rising prices denominated in the world reserve currency to consume fewer of these commodities.

However, it should not be understood by this that generally rising prices cause declining consumption of commodities; nor, does this imply that either or both result from the huge quantities of ex nihilo money created by the state. Rather, each of these is called forth by the growing conflict between the conditions of production and the conditions of exchange under circumstance of chronic or absolute over-accumulation of capital. Over-accumulation of capital means precisely over-accumulation of commodities — of fixed and circulating constant capital, and, of variable capital, i.e., labor power. Moreover, we have to assume that this over-accumulation of capital exists not simply in one or a few nations, but universally throughout the world market. Hence, export of capital no longer serves to resolve the contradictions inherent to capital.

Those who are following my reasoning so far immediately recognize the logical contradiction in the above paragraphs: I have made the absurd assumption that commodities sell at prices below their values and, simultaneously, above their values. On the surface, it would appear that these two paradoxical assumptions could not exist, or, if they did exist, would bring social production to a halt entirely. As a practical matter, however, these two assumptions, although occurring side by side during the circulation of commodities, nevertheless only occur serially in any given example and in two different directions: the capitalist purchases labor power where the average wage is priced below its value, and sells wage commodities where prices of these commodities are above their values. Which is to say, the world reserve currency, despite massive ex nihilo creation that should force its exchange rate against other currencies down precipitously, actually exchanges against these other currencies at a higher rate than would otherwise be expected — it enjoys what economists refer to as an “exorbitant privilege”.

As a result, there is a tendency for production to move toward the least developed regions of the world market, where labor power can be purchased for a fraction of its value, while the resultant output is sold in the most developed consumer markets. Capital denominated in the world reserve currency, since this currency can be exchanged for any local currency, can simultaneously purchase labor power in those places where wages are below their values, and sell the produced commodities in those places where prices are above their values. Productive employment of capital in the home market of the world reserve currency holder grows increasingly unprofitable and commodities produced there suffer from uncompetitive world market prices. Capital, therefore, takes flight to the less developed regions of the world market. This event is accompanied by loud public pronouncements by politicians and the business community on the liberating effects of free trade; and by angry denunciations on the part of those capitals who, because of their size or circumstances, cannot shift their capital to take advantage of this process and are driven to ruin or speculation.

This has implications for the development of the world market, which, rather than slowing because of the general over-accumulation of capital within the world market, now increases at an astonishing rate and geometrically: Capital denominated in the world reserve currency can not only take advantage of the price disequilibrium between labor power and wage goods, it can further exploit the “exorbitant privilege” of the world reserve currency. This must accelerate the export of capital to less developed regions of the world market to take advantage of extremely favorable terms on which labor power can be exploited in the local currency, and, simultaneously, lead to the expansion of the portion of the total social capital denominated in dollars at the expense of the portion denominated in other currencies.

The problem I spoke of in an earlier post in this series — that wages are too high, and yet too low — resolves itself naturally into accelerated export of productively employed capital to those places where labor power can be had for a fraction of its value, to produce goods destined for markets where commodities are priced many times their actual value. This arbitrage, which can only continue so long as new sources of ever cheaper labor power can be found, must be expressed in a growing volume of Fascist State ex nihilo money creation, which, moreover, must not simply increase, but increase geometrically.

Inflation, the negative rate of profit, and the Fascist State (Part five)

According to the Wikipedia entry on Executive Order 6102, the fine for hoarding gold was ten thousand dollars. At the same time, the executive order demanded all private holdings be turned in and exchanged for government issued ex nihilo dollars at an exchange rate of $20.67 per troy ounce of gold. Using this as our base measure, the fine for hoarding gold amounted to 483.79 troy ounces of gold.

So, like the authors of the Wikipedia entry I tried to update the purchasing power of the 1933 ten thousand dollar fine into an amount of money equal to it in 2011 dollars. I went to the Bureau of Labor Statistics Consumer Price Index website and found that according to its statistical measure of inflation it now takes $171,897.69 to purchase the same quantity of goods that the ten thousand dollar fine would have purchased in 1933. According to the Bureau of Labor Statistics, the purchasing power of the ten thousand dollar fine has fallen to just 5.82 percent of its purchasing power in 1933. This is a fantastic depreciation in the purchasing power of dollars. However, it is also a gross lie — the depreciation of dollars has been far more severe than even the BLS admits, as we will now show.

The Problem of the Consumer Price Index

The Consumer Price index has been the subject of continuing controversy, including charges that it overestimates inflation and charges that it underestimates inflation. But, this controversy does not concern us here, since it is, in part at least, a political disagreement. What does concern us is the index itself, which popularly purports to measure the depreciating purchasing power of money in relation not to a fixed standard, but against a multitude of standards — that is, against a so-called basket of consumer goods.

Upon deeper investigation, however, I found, according to the entry in the Wikipedia on the United States Consumer Price Index, that the CPI was never meant to measure inflation or the depreciating purchasing power of money:

The U.S. Consumer Price Index (CPI) is a time series measure of the price level of consumer goods and services. The Bureau of Labor Statistics, which started the statistic in 1919, publishes the CPI on a monthly basis. The CPI is calculated by observing price changes among a wide array of products in urban areas and weighing these price changes by the share of income consumers spend purchasing them. The resulting statistic, measured as of the end of the month for which it is published, serves as one of the most popular measures of United States inflation; however, the CPI focuses on approximating a cost-of-living index not a general price index.

Intrigued by this disclaimer, I went searching for the difference between a measure of inflation and a measure of the “cost of living”. Among the information I found was an admission by the Bureau of Labor Statistics that the Consumer Price Index not only does not measure inflation, but it is not even a true measure of the cost of living. It is limited to measuring market purchases by consumers of a basket of goods and services.

According to Wikipedia, the BLS states:

The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living. Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this to also take into account changes in other governmental or environmental factors that affect consumers’ well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime that would constitute a complete cost-of-living framework.

Since, the BLS, by its own admission, incompletely measures the amount you must spend to achieve a presumed certain level of “utility” — the so-called Standard of Living — how do they define this “utility”? Further reading explains:

Utility is not directly measurable, so the true cost of living index only serves as a theoretical ideal, not a practical price index formula.

So, to sum up: the Bureau of Labor Statistics Consumer Price Index is a measure of a theoretical construct which cannot be defined, is difficult to determine, and, in any case, is not directly measurable: the so-called “Standard of Living“.

The hidden costs borne by society

If we go back to the first paragraph of the original definition of inflation proposed the the Wikipedia entry, we find this:

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.[my emphasis] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

Inflation is defined as the general rise in prices of goods and services, but also as the erosion of the purchasing power of money — i.e., the depreciation of money. Against what is this erosion of purchasing power to be measured? Here, the Wikipedia is silent, leaving us with the wrong idea that the “real value” of money is to be measured against the commodities we can purchase with it. As this “real value” erodes, we can purchase fewer goods and services. This implied method of measuring the depreciation of money, however, does not give us a general measure of the price level, as the BLS admits, but only a measure of the price level as expressed in a series of transactions in the market for so many individual commodities.

The war in Afghanistan, for instance, would not be captured by this implied method; nor, would the cost incurred by society as a result of  the damage British Petroleum caused to the Gulf of Mexico; nor, the cost borne by society for the Fukushima nuclear disaster, or that created by the bailout of the failed banksters on Wall Street. Unless these costs actually entered into the prices of commodities in market transactions, they will not show up in the Consumer Price Index. And, a considerable  period of time could pass between the events and their expression in the prices of commodities tracked by the Consumer Price Index. Moreover, the change in prices of the commodities tracked by the Consumer Prices Index are subject to innumerable factors arising from market forces within the World Market — making it impossible to trace any specific fluctuation back to its source. On the other hand, each of the events of the sort cited above materially affected either the necessary labor time of society or the quantity of ex nihilo money in circulation within the economy.

The question to which we seek an answer is not how much the purchasing power of ex nihilo money has depreciated with respect to some arbitrarily established concept of living ltandard, but how much it has diverged from the purchasing power of gold standard money? To answer this question, we must directly measure these changes by comparing the general prices level against the commodity that served as the standard for prices until money was debased and replaced with ex nihilo dollars.

Gold standard dollars more or less held prices to the necessary social labor time required for the production of commodities; the divergence between gold and dollars since the dollar was debased, provides us with an unambiguous picture of inflation since 1933.  The divergence between the former gold standard money and ex nihilo money must be expressed as the depreciation of ex nihilo money purchasing power for an ounce of gold over time , or, what is the same thing, as the inverse of the price of gold over a period of time — as is shown in the chart below for the years 1920 to 2010.

Inflation since 1933 has been four times higher than BLS figures show

So, how does all of this relate back to the fine imposed on anyone found guilty of hoarding gold under Executive Order 6120? Remember, in 1933 the ten thousand dollar fine could have been exchanged for 483.79 ounces of gold. According to the BLS Consumer Price Index this translates into $171,897.69 in current dollars. However, 483.79 troy ounces of gold actually commands the far greater sum of $714,441.22, or 4 times as many dollars as the BLS Consumer Price Index states.

To put this another way, the Consumer Price Index is a complete fabrication by government to deliberately understate the actual depreciation of dollar purchasing power. The cumulative results of decades of false inflation statistics can be seen by simply comparing CPI statistics to the actual depreciation of dollar purchasing power against its former standard, gold. The extent of this fabrication can be seen in the chart below:

Moreover, for 2010, the annual average price inflation rate was a quite staggering 26%, when measured against the value of gold, not the paltry 1.6% alleged by the BLS.

If you didn’t receive a 26 percent increase in your wages or salary in 2010, you experienced a 26% loss in purchasing power — your consumption power was systematically destroyed by Washington money printing.

Using gold as the standard against which the depreciation of ex nihilo money is measured demonstrates how the Fascist State deliberately manipulates statistics for its own purposes to hide from the public the extent to which it manipulates exchange, and, therefore, the extent to which this manipulation has resulted in greatly increased prices for commodities.

But, gold does not only allow us to actually visualize the extent of this manipulation, as we shall show in the next post, gold also can demonstrate how this manipulation results in the needless extension of social working time beyond its necessary limit. That the Fascist State relentlessly extends working time beyond this limit, or, more importantly, that operates to maintain an environment of scarcity within society, which is the absolute precondition for Capital’s continuation.

To be continued

Inflation, the negative rate of profit, and the Fascist State (Part four)

Executive Order 6102

In the bare bones sketch of Marx’s theory I argued that the value of the object serving as money played no role in its function as money. This was incomplete, of course, but it served to advance my argument until I could directly address the implication of debasement of money by the industrial powers during the Great Depression. In reality, the price (actually value/price) mechanism can only perform its function to coordinate the separate acts of millions of individual labor times if it shares with commodities the attribute of being a product of labor itself, and, for this reason, requires a definite socially necessary labor time for its own production. Because gold has value, it can express the value of the commodities with which it is exchanged.

On the surface, a commodity is exchanged for money, and this transaction is the exchange of two absolutely unlike objects: the money serves no purpose but means of exchange, while the commodity with which it is exchanged is eventually consumed; the money never leaves circulation, while the commodity disappears; the money can always find a new owner, while the commodity only finds an new owner where it is needed. They are as different as night and day. Although, the flows of money through the community are only a necessary reflex of the flows of commodities through the community as it engages in a more or less developed act of social production. But, by always being exchangeable for commodities throughout the community, always being in constant circulation within the community, and by serving only as means of exchange, money brings millions of isolated individual acts of production into some sort of rough coordination.

As the physical expression of socially necessary labor time money is a natural and spontaneous means by which the value/price mechanism regulates the activities of the community in absence of the community’s own planned management. However, I must emphasize, money is only the expression of socially necessary labor time; it is not and should not be mistaken for socially necessary labor time itself. And, it can only express the socially necessary labor time of society, because the community requires some definite socially necessary labor time to create it. What object serves as money for the community is, therefore, of general interest to the whole of the community, and has a very long history — most of which, since we take this history as our starting point, is of no interest to us here. I only note that since this General Interest must take some form, the form it takes during the period under discussion, from the Great Depression until the present, are the laws of the various States regarding the legal definition of money.

Breakdown of the law of value emergence of the Fascist State

On April 5, 1933, the Roosevelt administration issued Executive Order 6102. The Wikipedia outlines the scope of this executive order:

Executive Order 6102 is an Executive Order signed on April 5, 1933, by U.S. President Franklin D. Roosevelt “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates” by U.S. citizens. The bank panics of Feb/March 1933 and foreign exchange movements were in danger of exhausting the Federal Reserve holdings of gold. Executive Order 6102 required U.S. citizens to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce. Under the Trading With the Enemy Act of October 6, 1917, as amended on March 9, 1933, violation of the order was punishable by fine up to $10,000 ($167,700 if adjusted for inflation as of 2010) or up to ten years in prison, or both.

This simple executive order, which was succeeded by several additional orders during 1933, and by the Gold Reserve Act of 1934, removed gold as the standard for the dollar, made it illegal to own more than a small amount of the metal, and compelled individuals under penalty of law to turn their gold over to the Federal Reserve in return for the then existing exchange rate of $20.67. On the surface this order just gave the State monopoly over the ownership of gold and reduced money to just a State-issued token. While this step was, in and of itself, fairly staggering, particularly when we consider that it was duplicated in all the big industrial nations at the same time, once we consider the full ramifications of the orders and succeeding law in terms of the various national economies, it quickly becomes apparent that a state monopoly over the ownership of gold, and the replacement of gold standard money by State-issued currency was only the most obvious effect. John Maynard Keynes, who examined the issue entirely from the standpoint of a bourgeois economist, had some inkling of the far reaching implication of State issued ex nihilo money. Fifteen years earlier, he argued that the inflationary consequences of excessive money printing amount to the confiscation of private property:

… By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

If excessive money printing raised the question of secret confiscation of property, the actual confiscation of gold, and the replacement of gold money  by state-issued currency amounted to the explicit expropriation of monetary wealth. Yet, even this implied expropriation of social wealth in its capitalistic form was not the most significant implication of the state action: From the standpoint of Marx’s theory, the debasement of money was the abolition of the historically developed natural and spontaneously created value/price mechanism as the regulator of the social act of production. In place of a natural relation between the values of commodities and the prices of commodities, the relation between the two was, after this, to be established as a matter of state policy. This separation is the absolute development of the historical antithesis between the commodity and money, since paper money has no use except as medium of circulation of commodities — as means of exchange. Moreover, by this executive order severing gold from money, we see not only that the value of the commodity was severed from its price, but, further, that production was severed from consumption; labor power was severed from wages; surplus value was severed from profits. Finally, with the law of value no longer determining the social necessity of a given expenditure of labor time, the labor time expended by society was no longer limited by social necessity.

In place of the historical, spontaneous and naturally developed mode by which the separate activities of millions of members of Civil Society in every country had been hitherto regulated, social labor and its duration was now regulated by the State, and under conditions determined solely by the State. The abolition of the gold standard did not simply sever the connection between gold and money, and abolish the value/price mechanism, it also placed the total social capital of Civil Society at the disposal of the State — or, what is the same thing, announced the emergence of the Fascist State. Property, the classical thinkers argued, is the power to dispose of the labor of others, hence this total social capital was converted into the property of the State.

The Fascist State as regulator of production and consumption

The entire social capital of every nation was expropriated, precisely as Marx predicted, but in a fashion and under circumstances quite different than those which might have been welcomed by him. As I argued in another post, Marx’s differences with Bakunin came down to difference over whether the Proletariat would be compelled to effect management of social production according to the principle of “to each according to his work”, that is by replacing the existing Civil Society and the State with new rules enforcing labor equally on all members of society. Marx was not making this argument in a vacuum; his theory predicted a breakdown of the law of value as the regulating principle of social labor before the necessary conditions were established for a fully communist society. Society would be required by this breakdown to step in and manage social labor directly and according to a plan. Marx’s argument with the Anarchists essentially asked the question, “By what rules would this management be effected?” As is obvious from an investigation of history, this question was settled decisively in favor of the existing Civil Society, which rose to manage its General Interest — i.e., its interests as a mode of Capital — through the machinery of the Fascist State.

Within ten years of this act, more than 80 million people were dead and the Eurasian continent lay in ruins, as each nation state, finding itself in total control of the productive capacity of their respective nations, immediately put this productive capacity to good use by trying to devour their neighbors — unleashing a catastrophe on mankind. By 1971, with the collapse of the Bretton Wood agreement, a single fascist state, the United States, had imposed on the survivors the very same control over the other national economies, that it imposed on its own citizens.

As I stated in the previous post:

However, there are so many holes in the economist’s definition of inflation, as a matter of due diligence I must consider inflation from the standpoint of Marx’s labor theory of value. If I arrive at the same conclusions about inflation that are expressed in the Wikipedia definition — or at conclusions that throw no new light on the subject — then I will have spent about five hours pursuing a dead end.

I have now considered inflation from the standpoint of Marx’s labor theory of value and have come to decidedly different conclusions than those drawn in the Wikipedia entry on the subject. These conclusions, I argue, suggest a catastrophic breakdown of the conditions of capitalist production and exchange during the Great Depression; and, based on this, the assumption by the State of direct management of social production, the conversion of the total social capital into the property of the State — not by means of outright seizure of this capital, but by taking control of the conditions of exchange — and the extension of this relationship to the entire World Market.

With the assumption of management of social production by the Fascist State, the law of value, which served to limit the average price of the commodity to the socially necessary labor time required for its production, no longer imposed such limits on prices. Hence, prices could be determined by factors other than the value of these commodities. On the other hand, with the law of value — that is socially necessary labor time — no longer imposing a limit on the total labor time of society, this labor time could be expanded in a form that is completely superfluous to social necessity. We can, therefore, define inflation as the chronic general rise in the price level resulting from the further extension of hours of labor beyond their socially necessary limit; or, prices held constant, by the reduction of the ratio of socially necessary labor time to the actual hours of labor expended. Finally, we can see that inflation itself is no more than the result of Fascist State policy, which, acting as the social capitalist, seeks the ever greater extension of the working day even as the productive capacity of society reduces the necessary labor time of social labor.

In my next post, I will examine each of these conclusions in turn.

To be continued

Inflation, the negative rate of profit, and the Fascist State (Part three)

The Wikipedia definition of inflation includes this rather silly statement on the definition of the so-called “real value” of money:

…inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

In this statement the “real value” of money is reduced to the purchasing power of the currency, which is simply the inverse of the price of a commodity. If a commodity has a price of ten dollars, the “real value” of a dollar in relation to this commodity is one tenth of the commodity. By the same token, the value of the commodity can be said to be ten times the “real value” of one dollar. The value of the commodity is, therefore, only its price in some unit of the currency, and, in this way the economist can dispose of the nasty implications of Marx’s labor theory of value — that the classical notion of value amounts to a death sentence for Capital itself, and of the sum of relations of society founded on Capital.

It is typical of economics that its practitioners hold to the notion reality can be abolished merely by refusing to acknowledge its existence. Thus, tens of millions of unemployed women and men no longer exist simply because the Bureau of Labor Statistics’ data removes all evidence of their existence. Unemployment like the classical notion of value is no more than a conceptual construct which can be disposed of by replacing it with a new concept. However, there are so many holes in the economist’s definition of inflation, as a matter of due diligence I must consider inflation from the standpoint of Marx’s labor theory of value. If I arrive at the same conclusions about inflation that are expressed in the Wikipedia definition — or at conclusions that throw no new light on the subject — then I will have spent about five hours pursuing a dead end. The effort, however, is worth it.

Price and value

It may surprise you that, in Marx’s model, money can be thought of as something without any value at all. Value is a characteristic of a commodity, and, insofar as we consider money not as money, but as just another commodity (for instance, the gold in a necklace) it does indeed have value equal to the socially necessary labor time required for its production. But, when serving as money, gold’s value as a commodity never enters into the equation. As money, gold’s entire role in social production is to express the value of the commodity, not its own value; and this it does in its material body. Marx would never speak of the “real value” of money, because as money, its “real value” is not what matters — what matters is its physical material.

Simplified Marx’s model is this: When we speak of the value of a commodity, we are referring to the duration of labor time socially required to produce the commodity. This socially necessary labor time is expressed in a quantity of gold that requires the same duration to produce. The socially necessary labor time required to produce the commodity is the value of this commodity, while the quantity of gold equal to this socially necessary labor time is not the value of the commodity, but its price. Value and price are two different animals — in the market, where the commodity is exchanged for money, the the value of a commodity and its price in gold are just as likely represent two different quantities of socially necessary labor time as they are to agree. They will agree only on average. In its simplest form, Marx’s theory of value assumes not that the price and the value of a commodity are the same, but that they are NEVER the same — the price of the commodity and its value only coincide by innumerable transactions in which the two only coincide on average.

If the price and the value of a commodity never coincide, what is Marx’s point? His point isn’t to find the secret of prices of commodities, but to demonstrate how the millions of separate and isolated activities of the members of society are, through this mechanism of constant price fluctuations, converted into an embryonic form of social production. While the economist is trying to crack the great ‘mystery’ of price, Marx is showing how private productive activity naturally begins to inch its way along the long road to fully social cooperative productive activity.

The point of the exercise is to advance a theory showing how the labor time of the community, composed as it is of millions of separate labor times is regulated naturally through the pricing mechanism, since the community does not regulate this labor time consciously and according to a plan. In this sense, I think, Marx is not breaking any new ground in relation to the classical writers like Adam Smith. Marx’s unique contribution to this discussion is that in place of labor time generally, he posits socially necessary labor time — which is to say, he shows that productive activity is carried on under the conditions that are established generally in society and not directly arising from the decisions of the individual. The individual’s productive activity is, therefore, being constantly coerced by conditions that are entirely beyond her control, which impose on her the requirement to constantly reduce the amount of time she spends on the production of her commodity.

The conclusion Marx drew from his investigation, briefly stated, was this: If there is no connection between the socially necessary labor time of society and the prices of the commodities produced during this socially necessary labor time, the pricing mechanism could not effect a coordination of all of the millions of individual acts of production within society. We already know these millions of individual acts are not planned and consciously coordinated by the members of society; if we presume these millions of individual labor times are regulated naturally by prices, we have to accept the idea that price itself is doing what people are not, namely effecting regulation of millions of different labor times. So while, in the real world, a commodity requires so much definite time to produce, how much of this time is considered necessary, and how many of the items are to be produced, is determined by society in general, and this value is imposed on the individual in the very real form of the commodity’s price.

When too few of the commodity is produced, its price rises signaling a need to increase the amount of social labor expended on production of the commodity, when to many of the commodity is produced, its price falls signaling a need to reduce the labor time expended on production of the commodity. On the other hand, if the average amount of time need to produce to commodity falls, its price falls signaling a need to reduce the labor time expended on production of the commodity; and, if the average amount of time need to produce to commodity increases, its price increases signaling a need to increase the labor time expended on production of the commodity. This is not rocket science, folks. It is just common sense.

Capital and value

Capital introduces an additional complexity to what I have stated above: with capital the aim of production is not to produce the commodity, but to produce a profit on production of the commodity. The capitalist doesn’t care about the commodity in the least, he is totally focused on seeing that he ends with more gold in his pocket than he began with. To do this he begins with so much money-capital, which he lays out on labor power and the other necessities demanded by production of the commodity. Since he is bound by the same laws that govern production generally, he can only realize a profit if the labor power he purchases can produce more value than it costs for him to purchase it, that is if he can realize, in addition to the money-capital he advanced, this same quantity of money-capital plus an additional sum of money-capital.

However, there is a problem here: when we say the capitalist aims to produce more value than he laid out at the beginning, we are also saying the capitalist aims to produce more socially necessary labor time than is expended in the production process. Since, at every point in the development of Capital, the existing value of labor power in the form of wages is given, the new value created must result in still more labor power in the form of additional wages — the number of laborers under the direction of one capitalist constantly expands, fed by the millions of smaller, less productive, capitalists and property owners who a driven to ruin by the advance of Capital itself.

For our purpose in understanding inflation, what is important to note is that the very process of capitalist production itself presupposes that value, or, socially necessary labor time, exists in two contradictory forms: first, in the value of the wages paid out by the capitalist for labor power; and, second, in the form of additional value over these wages, which, having been newly created in the production process, can now reenter production as additional capital only if it is realized through sale. If we assume for purposes of this argument that the wages paid out are immediately realized by the existing mass of laborers in the form of food, clothing and shelter, we still have to consider how the additional sum of newly created value is realized.

Making a straight-line assumption for the sake of simplicity, this newly created value has to find a market beyond the existing social capital — i.e, it has to enlarge the market for the existing social capital. If this cannot be done, the newly created value cannot be realized, and further expansion of Capital cannot occur. The periodic crises when Capital momentarily out runs the conditions of its own process, is converted from its merely relative form into its absolute form as the capitalist can no longer realize profit on his production and ceases productive activity altogether — industry grounds to a halt, millions of laborers are idled, along ten of thousands of factories, prices of commodities collapse and lay unsold and the flows of money capital cease. While Capital presupposes the constant reduction of socially necessary labor time in the form of wages paid out, it simultaneously presupposes the expansion of socially necessary labor time in the form of additional wages for additional labor powers.

The contradiction inherent in value comes to the fore: to resume production socially necessary labor time must expand, but, since this socially necessary labor time is, in this example, limited to the wages paid out to the laborers, it can expand only on condition that wages increase. On the other hand, the increase in wages must reduce the profits of the capitalist, and the portion of existing socially necessary labor time that the capitalists claims as their rightful profits. Since, on no account are the capitalists willing to part with one additional cent in wages, they opt to maintain their profits by reducing wages still further; however, since this further reduction of wages only reduces still further socially necessary labor time, their actions only increase the problem. Wages are too high, yet, paradoxically, they are also too low.

Price and value reconsidered

Under the assumptions I am using of a very barebones description of the problem posed by the inherent contradiction in value, I need to sum up some of the characteristics of the contradiction. First, there is a contradiction between the actual labor time expended on the production of a commodity and the socially necessary labor time required for its production. Second, there is a contradiction between the value of the commodity itself — i.e., the socially necessary labor time expended on the production of a commodity — and the expression of the value in the form of the price of the commodity.

To these two already identified contradictions we must add a third: there is a contradiction between the price of the commodity denominated in units of the money and the socially necessary labor time required for the production of the object that serves as the money. While money denominates the price of a commodity, and thus express the value of the commodity, it does not necessarily follow that the money itself contains the same socially necessary labor time as is contained in the commodity. This much is already obvious, since prices fluctuate for innumerable reasons away from the value of the commodity, likewise this fluctuation is accompanied by corresponding fluctuations away from the socially necessary labor time contained in the money for equally innumerable reasons — for instance, a sudden discovery of a huge new source of gold which serves as the money, may force gold to exchange with commodities below its value for a time, which is to say, it takes a larger than “normal” quantity of gold to purchase a given commodity.

This is further complicated when we consider that gold was often not used directly in transactions, but substituted by a placeholder like paper money. In fact, Marx assumed that, for most transactions, gold was not even necessary even when it was formally designated as the money. The replacement of gold by paper tokens in circulation was entirely possible within certain limits. It was only a step from here for our economist to come up with the ‘brilliant’ idea that is didn’t matter what served as money. In this sophomoric reasoning, since money itself only played a token role when it served to facilitate transactions, anything could serve as money as long as it could fulfill this token role. The value of commodities could forthwith be expressed in units written down on paper or embedded in the dancing electrons on a computer terminal. As long as the State legally determined that these tokens were money, they could serve the role as effectively as any commodity money like gold.

This idea, although floating around in society for several decades, did not actually become the dominant view of money until conditions very much like those I described in the preceding section of the post burst into full bloom in the Great Depression. Those conditions brought all the contradictions inherent in value to the surface in a rather awesome fashion: to address the impasse created by the fact that wages were too high, and, at the same time too low; that socially necessary labor time in its wage form stood in complete contradiction with socially necessary labor time in its profit form; and, that, therefore, the value of commodities stood in direct conflict with the prices of commodities; within a short period of about five years every industrial nation devalued its currency and went off the gold standard. The contradictions inherent in value led society to sever the relation between value and price — not just in theory as previously, but in reality and throughout the World Market.

To be continued

Are we still in a depression? Gold says, “Yes”.

Gold prices have averaged $1218.57 for the year 2010, as of yesterday. For the whole of 2009, the average price of gold was $972.35. This was a change of some $246.22 year over year — a rise of 25.3% in the average price of gold.

We can assume, based on these figures, that the, so far, ten years long depression beginning in 2001 is still under way with a vengeance. The price of gold in 2001 averaged $277.99 per ounce. It has now risen to 426% of its 2001 price.

Between 1970 and 1980, during the depression of the 1970s — the so-called Great Stagflation — gold prices (once they were allowed to float by the Nixon administration) rose by more than 1700%, from an average for the year 1970 of $35.94 to the then unimaginable 1980 year average of $613.95.

Why does the price of gold rise during a depression?

It did not always do this. In 1932, the dollar was fixed at about 1/22 of an ounce of gold, which meant it took approximately 22 dollars to buy an ounce of gold. Because the price was fixed by Washington the price of gold did not vary as widely as it does now; during depressions money merely became scarce.

The gold standard was a form of government price fixing. (We know this is a silly way of looking at the problem, since the intention wasn’t to control the price of gold, but to anchor paper dollars to some real good having a definite value, however it serves our purpose for the moment.) During depressions, as the volume of transactions fell, less gold was needed in circulation. Thus significant quantities of gold fell out of circulation and into private hoards.

As gold was withdrawn from circulation during depressions, paper dollars followed, because buyers and sellers found the purchasing power of these dollars were dropping in comparison to the same good priced in gold.

The result would be fewer dollars available — creating a credit crunch, like the one we experienced in 2008 and since.

As you can imagine, gold-hoarding was a big problem for those who had accumulated debts during the expansion that they needed to service even though the economy was depressed. Think of our homeowners in today’s crisis: as fewer people are employed, fewer wages are paid out, and fewer people are able to meet their mortgage debt service burden. What appears as a credit crisis is simply the downstream effects of unemployment.

The response of the Roosevelt administration to this credit crunch was to devalue dollars against gold by 70%, — from 22 dollars an ounce to 35 dollars an ounce — and this devaluation allowed the economy to stabilize. However, this “stabilization”, like today’s bankster bailout — was purchased by a massive reduction in living standards of working families — it amounted to a 70% across the board cut in wages.

Yes. Despite FDR’s reputation as the hero of the working class, he “stabilized” the economy by ruthlessly slashing workers’ wages.

If we fast forward to 1970, when the Nixon administration ran into difficulties by printing dollars to stabilize the economy as it was contracting, the massive flood of worthless dollars tipped his administration into another devaluation — but this time, instead of simply fixing the dollar to a an even smaller quantity of gold, Nixon allowed the dollar to float against it.

The depression continued unabated, but dollars, no longer fixed to gold, simply lost their purchasing power. In turn, those with the means to do so sold their dollars and bought gold. They were still hoarding gold, but this hoarding was expressed not as the shortage of money, but in the depreciating purchasing power of now worthless dollars.

Since Nixon’s Roosevelt-style assault on society, gold hoarding is now expressed in the rise of its price; while the purchasing power of dollars evaporates. Today, the rising price of gold is one of the surest indicators that we are still in a depression.

How quantitative easing works — or doesn’t (Part One)

From the wiki we get a definition of Quantitative Easing:

The term quantitative easing (QE) describes a monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system. This policy is usually invoked when the normal methods to control the money supply have failed, i.e the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.

In this excerpt from the wiki, we see that quantitative easing is a method of flooding the economy with money when other, more traditional, methods have already failed. QE is an acknowledgment that the amount of currency in circulation in the economy is probably still contracting, which implies the economy is contracting as well.

QE is undertaken on the assumption that the amount of economic activity can be increased by increasing the amount of currency in circulation. This is because, in times of economic contraction (i.e., a depression), as the economy contracts, money is withdrawn from circulation in order to satisfy (payoff) debts, and no new opportunities for productive investment exists. As money is withdrawn from circulation, this withdrawal is felt as a shortage of credit like the one we are currently experiencing.

This is the rub, however: for reasons we will explain below, QE cannot increase the amount of currency in circulation by itself.

For now, let’s look at how the policy is implemented:

A central bank implements QE by first crediting its own account with money it creates ex nihilo (“out of nothing”).

From this excerpt it is possible to conclude that QE is only possible in an economy with a debased fiat currency. Why? Because, of course, government cannot simply create more gold or other metal money “out of nothing”. Gold requires rather arduous physical exertion in comparison to merely entering the number 1,000,000,000,000 into a computer terminal.

The money created “out of nothing” can itself only be a fiction. It is a fiction of money, since, unlike metal money, it requires no meaningful exertion of human effort, and, hence, has no value.

Most writers — even those who understand that this currency is not really money — still consider it some sort of token representation of money — akin, in some fashion, to the paper money that circulated in the economy prior to the Great Depression. Because of this mistake, their analysis of the economy must be defective. The paper currency that circulated before the Great Depression was token money precisely because it could be exchanged for gold in some fixed proportion. Gold circulated alongside these tokens in the economy — you could walk into a store and use a gold coin to buy groceries.

In short, token money was converted into fictitious money not because it replaced real money in circulation, but because gold was withdrawn by law from circulation as money. This withdrawal removed the token character of the token.

And, why would gold be removed from circulation? Remember our earlier statement: money is withdrawn from circulation leading to a contraction of credit, because economic activity itself is contracting. When the Great Depression hit, gold was pulled from circulation to satisfy debts, and because the amount of profitable investment outlets for which it could be used suddenly shrank. All over the economy, gold fell out of circulation and into lifeless hoards. At the same time, like a game of musical chairs, when the music stopped, everyone without gold suddenly found themselves in dire need of cold hard cash, yet none could be found.

The implication of the above for QE is obvious. During the Great Depression gold did not disappear; it simply reverted to a dead hoard of metal. On the one hand, there was no shortage of money, but an excess of money. On the other hand, however, this money could not actually circulate in the economy since it could serve no productive purpose as capital — just as there were no shortage of workers, or shortage of factories to turn out product, millions of workers and thousands of factories stood idle because no profitable use for them existed as capital.

It is the same for the Federal Reserve’s QE program. It is not enough simply to create a trillion fictitious dollars, having created this fictitious money “out of nothing”, the Federal Reserve now has to get this new fiction to circulate in the economy. This first step is to hand it out to the agents of the Federal Reserve:

It then purchases financial assets, including government bonds, agency debt, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as open market operations.

Did you see what just happened? According to the wiki, the Federal Reserve created fictitious money — something absent any value at all — and then used it to purchase some other things: government bonds, agency debt, mortgage-backed securities. These financial instruments, which are in the possession of banks and other financial institutions, are voluntarily sold to the Federal Reserve for a sum of fictional money having no value at all!

It may appear at first that the Federal Reserve is systematically stripping the banks and financial institutions of their assets in return for worthless dancing electrons, but the situation is just the opposite. This is not robbery, folks. There is no coercion involved in the transaction, yet banks and other financial institutions voluntarily hand over their assets to the Federal Reserve in exchange for a fiction that doesn’t exist until the Federal Reserve creates it. Assuming that the CEOs of these financial institutions are not insane, this transaction amounts to an admission that the bonds, debt paper and securities sold have no value — that the face value of the assets are as fictional as the dancing electrons for which they are being exchanged.

There is, of course, this difference between the two fictional objects: at least so far as toxic mortgage-backed securities are concerned: there is no market for them, while currency is currency and can always be spent — especially when the currency in question are dollars.

Also, it should be acknowledged, since the object of the exercise is alleged to be a lowering of interest rates generally, the Federal Reserve will likely be paying more than the original price of the bonds, agency debt, and mortgage-backed securities. In this way, the Fed can push interest rates down still further. (This is because, the higher the price paid for a bond, or like asset, the lower is the interest rate accruing to it.)

So, according to the wiki, the Federal Reserve implements QE by purchasing certain assets from banks for more than the banks paid for them originally — and, this it does in order to push interest rates as low as it can. Rather than stripping banks of their assets with worthless dancing electrons, the Fed actually absorbs worthless assets from them — assets the banks could not sell since there is no market for them — and hands out more currency than the banks initially paid to purchase the assets.

Since, the Federal Reserve is only an oligarchy of private banks, ruling behind the fig leaf of laws which give them “responsibility” (read: control) of the world reserve currency, it is unimaginable that the situation could be otherwise. This much is revealed in the next silly statement by the wiki:

The purchases, by way of account deposits, give banks the excess reserves required for them to create new money, and thus hopefully induce a stimulation of the economy, by the process of deposit multiplication from increased lending in the fractional reserve banking system.

The authors of the wiki entry invite us to believe that the banking cartel, which already has the legal capacity to create currency out of nothing, now needs currency on hand to create this currency out of nothing! In fact, the actual mechanism of currency creation differs drastically from this scenario: Banks create currency simply by creating a balance in your account whenever you borrow — or in the account of the person from whom you purchase something. They do not need to have any excess reserve in place to create this money, since all of this is done at a computer terminal.

Excess reserves, therefore, do not stimulate lending at all. And, the wiki, in this particular explanation, gets us no closer to understanding how QE actually works.

In part two, we will try to get closer to a real explanation.

Chart Porn Marathon (The revised and extended version)

Barry Eichengreen and Kevin H. O’Rourke have been updating us on the progress of this depression by comparing it to the big one, The Great Depression. Their original post on April 6, 2009 captivated their audience, and we also ran some commentary on it here.

One thing that struck us was that we might compare the two events to the totally overlooked depression of the 1970s – The Great Stagflation. The reason why this one is missing and, perhaps, lost from official economic history is that it did not resemble the widely accepted official definition of a depression. For instance, as shown in the graph below, year over year Gross Domestic Product enjoyed an unbroken expansion during the entire period.

Still more notes on the delveraging economy:

What we have written here is all speculation based on our understanding of how the economy works. Please do not construe it to imply you have been wasting your life in a job which produces nothing, creates nothing, and only serves to empty your remaining years on this earth into a black hole of worthless activity.

To continue:

For the past seventy to eighty years, an increasing portion of transactions in our economy have been based on the exchange of some real thing for a notional placeholder – a valueless piece of fancy paper with a picture of a dead president on it – and, worse, by some promise of future payment in the form of this fancy piece of paper.

That real thing – a single family home, car, 42 in wide screen high definition plasma television, or pair of shoes – has long since suffered the ultimate end that all such goods suffer: It was consumed through days, months or years of use, until nothing remained of its original utility to us.

Shoes wear out, cars die by the side of the road, the television goes on the fritz right in the middle of American Idol.

Even a house, the most durable of our goods, eventually succumbs to old age.

It is what things do.

But, of all the goods mankind has ever created, there is one exception to this rule: Money.

Money is never consumed because it exists simply to serve as the medium by which goods circulate in our society until these goods fall out of circulation to be consumed.

For instance, it has been estimated that eighty-five percent of all the gold mankind has ever pulled from the ground and stripped of its impurities lies somewhere in some vault of a central bank, or around the neck of some rap artist.

And, here is where it gets really interesting:

What is true for gold, is true for money in general. And, we believe, this also has to be true for the chain of incomplete transactions waiting to be completed since the Great Depression: Every transaction where someone made a purchase on credit that was not eventually completed with the creation and sale of a new good, is still hanging out there in our economy waiting to be completed- every home mortgage, car note, or bag of groceries, whether repaid or outstanding.

These incomplete transactions are sitting as an asset on the books of some financial institution or on the computer in the basement of some central bank.

Mind you, we’re not talking only about debt which has not yet been repaid with the fiat money in your wallet: even debt which has “officially” been repaid with dead presidents, but has not been replaced by a real good, must be considered incomplete.

The reason is simple: The dollar is a valueless piece of paper, which, while it can stand in the place of real money (gold or other precious metals) for purposes of facilitating transactions, cannot itself complete those transactions, i.e., can not do what real money does: replace the value of the good that has been transferred from seller to buyer.

Thus, in any such transaction, the seller has accepted, in return for his/her good, not the money equivalent of that good, but a pretty piece of paper.

This point must be understood: Should there arise a circumstance where real money is called for, where paper can no longer serve as a representative of this real money, because it has no value in and of itself, the aggregate value of all such transactions, all the way back to the moment the dollar was debased from gold, will vanish, as if they never occurred.

All of the “wealth” allegedly created by, and predicated on those transactions, collapses in a massive catastrophic implosion.

If these transactions expire without being completed – without the previously consumed good being replaced by a new good – the economic value of the transaction vanishes, in much the same way as the ledger value of your mortgage vanishes when you default and are foreclosed.

Since the great mass of these incomplete transactions will never be completed owing the the very structure of our economy, where superfluous work composes the great bulk of economic activity, and only adds to the volume of incomplete transactions. the only thing standing between current valuations of assets in the economy and this massive implosion is the relentless addition of even more such transactions.

For all these years, Washington has forced the use of fiat money in place of  money, because of the one attribute of money for which fiat cannot be substitute:  money’s irreconcilable antagonism to superfluous work, to work that that is meaningless and has no productive value.

The costs of this meaningless work is now embedded in the price of every good sold in our economy, every asset held, and, most of all, in the very employment of millions across this nation.

To evaporate, all that is now required is a trggering event: an event, we believe, that has already happened…